Forecast

Connecticut hedge funds still dominate, but face questions

By Paul Schott| on
November 30, 2018

Bridgewater Associates Founder Ray Dalio speaks during day one of the Greenwich Economic Forum at the Delamar Greenwich Harbor in Greenwich, Conn. Thursday, Nov. 15, 2018. The two day event "brings together 300+ of the worlds leading minds in finance and public policy to discuss and debate the global risk environment." Greenwich billionaires Ray Dalio, of Bridgewater Associates, and Paul Tudor Jones, of Tudor Investment Corp., were featured speakers at the event.

Bridgewater Associates Founder Ray Dalio speaks during day one of the Greenwich Economic Forum at the Delamar Greenwich Harbor in Greenwich, Conn. Thursday, Nov. 15, 2018. The two day event "brings together

Bridgewater Associates Founder Ray Dalio speaks during day one of the Greenwich Economic Forum at the Delamar Greenwich Harbor in Greenwich, Conn. Thursday, Nov. 15, 2018. The two day event "brings together 300+ of the worlds leading minds in finance and public policy to discuss and debate the global risk environment." Greenwich billionaires Ray Dalio, of Bridgewater Associates, and Paul Tudor Jones, of Tudor Investment Corp., were featured speakers at the event.

Bridgewater Associates Founder Ray Dalio speaks during day one of the Greenwich Economic Forum at the Delamar Greenwich Harbor in Greenwich, Conn. Thursday, Nov. 15, 2018. The two day event "brings together

The organizers of the inaugural Greenwich Economic Forum investment conference wanted to create an event that would rival Davos, Switzerland’s World Economic Forum. They have already made major progress toward that goal.

Held Nov. 15-16 at the Delamar Greenwich Harbor hotel, the summit attracted several hundred professionals from around the world and leaders of some of the top Connecticut hedge funds, including Bridgewater Associates founder Ray Dalio and Tudor Investment founder Paul Tudor Jones II.

The conference’s strong debut reinforced lower Fairfield County’s standing as one of the world’s most prominent hedge fund enclaves. But uncertainty clouds the industry’s future in the area. Hedge fund growth has stalled in recent years, and other states want to recruit Connecticut firms. And even after allotting tens of millions of dollars in subsidies in recent years, the state might need to do even more to bolster the sector’s long-term prospects.

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“For the most part, the hedge fund industry is facing the same challenges everywhere,” Connecticut Hedge Fund Association President Bruce McGuire, one of the conference organizers, said in an interview last week. “Connecticut is a microcosm of what’s going on throughout the industry.”

Large but stagnant presence

Connecticut has amassed the third largest number of active hedge fund managers, 211, according to financial-services data firm Preqin. Only New York and California have more hedge funds, which invest in a broad range of assets including stocks, bonds, currencies, derivatives and real estate.

After New York, the state ranks No. 2 in assets under management, with a total of about $384 billion. Westport-based Bridgewater Associates is the world’s largest hedge fund, with holdings of approximately $162 billion. Greenwich-based AQR Capital Management follows as the second biggest in the state, with assets totaling about $118 billion.

Combined, Bridgewater and AQR employ about 2,400 in the state, according to the state Department of Economic and Community Development.

Those employees are highly paid. Average wages for financial-services positions in lower Fairfield County last year ran at about $266,000, compared with an overall regional average of around $85,000, according to the state Department of Labor.

Other major hedge funds in the state include Greenwich-based Viking Global Investors and Stamford-based Point72 Asset Management.

“The state may be a little more expensive than some parts of the country, but relative to big financial markets in New York — and, to a lesser extent, in Boston and San Francisco — we look like a bargain,” Catherine Smith, the state’s economic development commissioner, said in an interview earlier this year. “And these firms are staying because they like the location, the talent we have and because their employees like living in the state.”

But the number of active hedge funds in the state has shrunk by 9 percent in the past three years, to about 700, according to Preqin. In five of the past six years, fund liquidations have exceeded fund launches in Connecticut.

Rising skepticism of hedge fund managers’ effectiveness, and a growing preference among those who still invest with those firms to do so with heavyweights like Bridgewater rather than newcomers, have contributed to the diminishing number of funds.

“That skepticism is entering into the areas of public pension funds and university endowments, which are major investors with hedge funds,” said Lawrence J. White, a professor of economics in New York University’s business school. “The rise of index funds is another manifestation of that skepticism. The question is asked, ‘Can I expect an active fund manager to do better than the overall market?’”

On the move?

At the same time, Connecticut faces increasing competition from other states such as Florida that have pitched their lower tax rates to Nutmeg State companies.

“My pitch is you should go ahead and give up ... capitulate and come to Florida and make it easier on yourselves,” Florida Gov. Rick Scott, a Republican who is now a U.S. senator-elect, said during a visit last year to Norwalk.

In recent years, some marquee fund managers, including Jones, have followed that advice, moving to a state that has no income tax. Jones’ firm, Tudor Investment, now has an office in Palm Beach, Fla. In Connecticut, the company has downsized. It announced earlier this year it would relocate its main offices from backcountry Greenwich to downtown Stamford.

Compared with Connecticut, Florida’s hedge fund industry is still small. It counts about 370 active funds, a total that has not changed much in the past five years.

But its finance profile continues to grow. The Miami-Palm Beach area has cemented itself as a hub for private wealth management, boosted by international business that comprises many large Latin American clients.

“When I moved here in 2009, there weren’t many hedge funds in Florida,” said Brian Gendreau, a clinical professor of finance in the University of Florida’s business school. “The biggest problem they ran into was ‘infrastructure.’ Finding the right law firms for them was always a bit of a problem. Today, the barriers to those firms doing business here are lower. I hear a lot about hedge funds and private equity funds and mainline asset-management funds moving to Florida.”

McGuire is more concerned about relocations to other Northeastern states.

“Boston and New York are bigger threats to us than Miami or Dallas,” he said. “How hard would it be to go to New York, where it would be easier to attract the next group of employees? That could happen if we did not take any action.”

To help reduce the risk of high-profile exits, Connecticut has given eight-figure subsidies to Bridgewater and AQR through the First Five Plus program launched by Democratic Gov. Dannel P. Malloy’s administration.

Bridgewater has qualified for up to $52 million in grants, loans and tax credits. AQR could receive up to $35 million in grants and loans. The companies’ allocations are based on targets for retaining and creating positions.

Those deals have sparked criticism from some watchdogs in a state plagued by chronic budget deficits and some of the starkest income-inequality gaps in the country. At the same time, those agreements have garnered bipartisan support in the state Legislature.

“These are very high-value outfits that employ hundreds of highly paid employees,” said outgoing state Sen. L. Scott Frantz, R-Greenwich, who served as a co-chairman of the Legislature’s Commerce Committee. “Regardless of the need for cash, it was smart for DECD to retain them.”

Looking ahead

In January, the industry will face a new governor in Democrat Ned Lamont and Democratic majorities again in both the state House and state Senate.

Frantz, who runs Greenwich-based private equity and venture capital firm Haebler Capital, suggested that Lamont visit every asset-management group and private equity firm “of significance” in the state. Lamont is connected to the finance sector through his wife, Annie Lamont, who is co-founder of the Greenwich-based venture capital firm Oak HC/FT. Annie Lamont spoke at the Greenwich Economic Forum.

“The new governor needs to sit down with industry leadership immediately to demonstrate the appreciation for one of the most valuable businesses in Connecticut,” Frantz said.

While state lawmakers have weighed proposals in recent years to hike tax rates on investment firms, McGuire suggested they take the opposite approach in the 2019 session. He wants them to consider creating a financial-services enterprise zone, supported by tax incentives, that would stretch from Greenwich to Bridgeport.

“We should promote hedge funds and other finance firms as much as California loves Silicon Valley,” McGuire said. “We should stop treating hedge funds as a dirty word and embrace brilliant people such as Ray Dalio and Paul Tudor Jones who have started amazing companies and all the smart people who want to go to work for those types of firms.”

While Jones has moved, longtime Greenwich resident Dalio appears content to stay. At the Greenwich Economic Forum, he touted the town’s location and diversity.

“There’s a reason it’s the center of hedge funds; there’s a reason it’s such a great community,” Dalio said during a panel discussion on Nov. 15. “I have friends here that are neighbors and then friends from China, friends from Abu Dhabi, friends from Singapore. And that’s the essence of the place. It’s right next to New York City. … It’s just a wonderful town.”